The Ontario Court of Appeal recently considered certain terms of settlement which included a term defining a sum to be paid in the event of default. The minutes required payment of $40,000 over four equal sums of $10,000 each. In the event of default of any payment, the sum due advanced to $120,000, less any sums paid to date.

The defendant made three of such payments and yet defaulted on the fourth and final payment. The settlement document then mandated that the sum of $90,000 was then due.

The Defendant argued that this term was not a genuine pre-estimate of its damages but rather was a penalty clause and hence unenforceable.

This submission was rejected. The theory put forward successfully was that the compromise was one intended to reduce the claim to avoid a trial and resolve the case without additional costs and not a penalty clause.

At first blush, it would appear that the penalty argument had legs. It would appear that the court was sending a signal that minutes of settlement should not be entered into lightly and was anxious to enforce the signed agreement.

The application for leave to appeal was dismissed.